Japanese automotive industry

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1741-038x.htm System dynamics study of the Japanese automotive industry closed loop supply chain Sameer Kumar and Teruyuki Yamaoka College of Business, University of St Thomas, Minneapolis, Minnesota, USA Abstract Purpose A major challenge the car industry currently faces worldwide is how to implement an effective reverse (also called closed loop) supply chain design while manufacturing environmental friendly cars from limited available resources. The purpose of this paper is to examine relationships between reduce, reuse and disposal in the Japanese car market with base scenario analysis using the car consumption data and forecast. Design/methodology/approach The system dynamics (SD) modeling analyzes the closed loop supply chain design for the Japanese car industry. Relationships between reduce, reuse, recycle and disposal are explored with base scenario analysis using the car consumption data and forecast. The SD model is subjected to extreme conditions test for structural validity. Dynamic analysis of different market scenarios for the Japanese car industry s reverse supply chain is conducted. Findings Japanese ELV regulation will trigger the growth of used car export rate to emerging countries. Without additional tax on used car export, manufacturers in Japan tend to export used cars. Imposing tax on used car export will place some control on such export and improve economic opportunities for remanufacturers, recyclers, government, manufacturers and consumers in Japan. Practical implications The used car export option in Japanese reverse supply chain may cause the emerging countries (importing used cars) not able to sustain this activity. The Japanese government and manufacturers should take initiative to create or support the reverse logistics facilities in export countries. Issues pertaining to how product components can be recycled, reused, or remanufactured should be factored in the product design phase to reduce the cost of products and raw materials. Originality/value The dynamic model of the Japanese car market provides an experimental simulation tool, which can be used to forecast the relationship between reduce, reuse, recycle, disposal and how various logistics elements will be impacted by government regulations on a long-term basis. Keywords Supply chain management, Recycling, Cars, Automotive industry, Japan Paper type Research paper Japanese automotive industry 115 Received April 2005 Revised November 2005 Accepted January 2006 Introduction Modern life has been greatly influenced by cars. The Organization for Economic Cooperation and Development (OECD, 2004), estimates that the number of motor vehicles will increase by 74 percent all over the world from 1997 to 2020. Currently about 80 percent of cars originate from companies in the USA, Europe, and Japan. The consumer trends in these major markets are more and more concerned about green environments. The European Union, for example, requires manufacturers to recycle auto bodies built since 2002. This is called the end of life vehicle program (ELV) (Kumar and Fullenkamp, 2004). Such government regulation has a significant impact on the reverse supply chain in related industries. One major challenge currently faced Journal of Manufacturing Technology Management Vol. 18 No. 2, 2007 pp. 115-138 q Emerald Group Publishing Limited 1741-038X DOI 10.1108/17410380710722854

JMTM 18,2 116 by the car industry is how to implement a viable design for a closed loop supply chain that allows manufacturing of environmentally oriented cars from limited resources. Early in the twentieth century Henry Ford introduced his Fordism theory. This theory has to do with the perfection of the assembly line method of manufacturing. Fordism, therefore, worked towards the formulation of a mass-consumption and mass-scrap society. This phenomenon has triggered consumers concerns for the environment and has required greater responsibility on the part of the producers. To respond to this customer expectation, the study of reverse logistics began in the early nineties principally with the Council of Logistics Management and has been recognized by both business and society (Stock, 1992). Since, then, a lot of research on this topic has been done and reverse logistics is still a growing academic field. Most issues in reverse logistics are also found in the forward logistics literature (Krikke and Ie Balanc, 2004). Thus, it is important to consider not only forward logistics system but also reverse logistics as well. This concept is termed a closed loop supply chain and a number of studies have been conducted in Europe on this topic (Seitz and Peattie, 2004; Rand, 2005; Georgiadis and Vlachos, 2004). An ideal closed loop supply chain disposal to the landfill should not to be an option and all materials used in products reaching end of life should be reused in the forward supply chain. Realizing the significance of a closed loop supply chain, many scholars have continued to write on recovery options from a management perspective (Thiery, 1995). Furthermore, many organizations or governments are using the three R s of reduce, reuse, and recycle to encourage end-customers to recycle or reuse the products and reduce disposal to landfills. Various macro economic elements of a closed loop supply chain include: direct reuse, repair, refurbishing, remanufacturing, and cannibalization. These elements are all defined as reuse. There are many business entities and organizations involved in this loop, such as the government and export dealers. All stakeholders should be actively included in this loop. For example, after the Japanese Home appliance recycling law (Ueno, 2003) was implemented, there were abandoned goods found on the road, or they were exported or discarded outside of Japan because the law ignored end customers financial burden and the capabilities of reverse remanufacturers and recyclers (Yamayoshi, 2004). Rest of the paper is organized as follows. It begins with a brief overview of system dynamics (SD) modeling methodology. Next, an overview of Japanese car industry is presented that includes: macro economic view of car industry; state of car recycling in Japan and Japanese car recycle law. Qualitative and quantitative analyses (that are part of SD modeling methodology) enable process understanding of Japanese cars closed loop supply chain. Model testing for extreme conditions support structural validity of SD model developed for the reverse supply chain. Car consumption forecast for the period 2004-2024 for Japan is determined that serve as the primary input to the SD model. The study also explores how Japan is engaged in disposing cars that reach end of life phase and export of used cars to emerging countries (such as, Poland, Czech Republic) including potential threats to car manufacturers in these economies. Base scenario analysis for Japanese reverse supply chain using SD model is carried out. Dynamic analysis that includes different market scenarios for Japanese car reverse supply chain is also conducted. Finally, based on what we have learnt from the SD modeling approach, conclusions and recommendations are made to highlight potential opportunities for improvements.

System dynamics approach The behavior of the system is analyzed through a dynamic simulation model based on the principles of SD methodology. The SD methodology was introduced in the early 1960s by Jay Forrester as a simulation methodology for analysis and a long-term decision making tool to solve complex industrial management problems (Sterman, 2000). The Logistics Systems Dynamic Group at Cardiff University has developed a methodology for a structured approach that can be used in the dynamic analysis of supply-chains and their re-engineering process (Naim and Towill, 1994). This concept was adapted by Tibben-Lembke (1998). It is called Cardiff methodology which is shown in Figure 1 and discussed below. In Cardiff methodology, there are mainly two stages of analyses. The first stage involves qualitative analysis. In this stage, both the objective of the study and the key drivers are identified. Then, the relationships among key drivers are shown in terms of either positive, or negative relationship. Once, the relationships have been established, qualitative factors (behaviors) are usually included in this flow. The second stage is the quantitative analysis. In this stage, the relationships described in the first stage are shown in terms of algebraic equations. After that, a simulation is conducted using SD computer software to represent the dynamic model. There are many examples of forward supply chains modeling. A recent study by Georgiadis and Vlachos (2004) developed a closed supply chain to show how ecological awareness impacts product recovery. Although closed loop supply chains that incorporate environmental concerns have already been developed, the value chain needs to be further studied in order to analyze the relationship between recycle and reuse and also the impact of government regulations. It may be pointed that there is a lack of SD research in studying closed loop supply chains from macro economic view. The model presented includes a major macro economical view of new, discarded, re-used and recycling products and the flows in a reverse supply chain. The consideration of major economical views in our model is an important difference from Tibben-Lembke (1998), Georgiadis and Vlachos (2004) and Towill and Naim (2004) approaches of studying manufacturing/remanufacturing system using control theory/simulation (Figure 1). All relationships in the model are analyzed based on cause and effect analyses and also through various mathematical formulae. The dynamic model provides an experimental simulation tool, which can be used to forecast the relationship between re-use, recycle and how various logistics elements will be impacted by government regulations on a long-term basis. Japanese automotive industry 117 Japan s car industry In order to have a deeper understanding of the car recycling law in Japan, it is essential to review the background. In this section, first a macro economic analysis is conducted to identify the issues and problems. Next, the research explores how the car parts are recycled to have greater understanding of the automotive reverse supply chain. Finally, the state of car recycling in Japan and the car recycle law are reviewed. Macro economic analysis According to The Society of Motor Manufacturers and Traders Limited (SMMT, 2003) in 2002, the total number of motor vehicles in use worldwide was 814.89 million units. The USA is listed with 225.45 million motor vehicles in use, accounting for

JMTM 18,2 Reverse Logistics System for Remanufacturing 118 Objectives Systems input-output analysis Qualitative Analysis Conceptual modal (Influence diagram) Flow diagram construction Control theory techniques Computer simulation techniques Statistical techniques Verification/ validation Dynamic Analysis Quantitative Analysis Figure 1. Cardiff methodology for supply chain design Sensitivity Analysis Source: Naim and Towill (1994) and Tibben- Lembke (1998) 28 percent of the world total, followed by Japan with 73.99 million, Germany with 48.22 million, Italy with 37.68 million, and France with 35.14 million motor vehicles in use. In recent years, many emerging countries have started importing cars from developed nations. According to Peugeot-Citron (2003) Company s Report, the Chinese

car market is expanding significantly. Their statistics show 2.3 million units were sold in China in 2002 which represents a 68.5 percent annual growth rate from the previous year. There is clearly a greater potential market in China and it is projected 3.2 percent of the population will own car vehicles by 2010 (Energy Data and Modeling Center, 2004). Furthermore, according to Ahmed (2004), the number of adolescents, aged 10-19, is at an all-time high of 1.2 billion. So, it can be estimated that more cars will have to be produced in the near future to respond to this demand. At present, every two people own a car in the USA. If the people in the rest of the world were to attain the same level of ownership as in America, an additional 2.5 billion cars would be needed. In other words, manufacturers would have to produce five times as many as the existing number of cars produced in 2003. Japanese automotive industry 119 Car recyclable part categories The problem of how to recycle cars cannot be solved without knowing various parts of reverse supply chain and how they are linked. In this section, the Japanese car recycling system is examined to serve as an example. Related problems and issues are also investigated. To make a passenger car, about 3,000 modular parts are needed. Figure 2 shows a typical car with various major modules labeled in figure. These modular parts are grouped into 20 categories from a recycling perspective. These categories and associated recyclable material are listed in Table I. These are the items that are recycled by Toyota Company. The state of car recycling in Japan Cars are recycled differently in each country because of different government regulations, social structures, political systems and also the level of economic development. In this 3 1 2 4 5 6 11 7 8 9 10 12 18 13 14 15 16 17 19 20 Figure 2. Twenty recyclable categories of Toyota car parts

JMTM 18,2 120 Table I. Relationship between Toyota s car parts and recycled parts categories Car parts Recycled parts categories 1. Window Tile 2. Seats Soundproofing for cars 3. Body Car parts or steel products 4. Trunk Car parts or steel products 5. Wires (copper) Copper products 6. Hood Car parts or steel products 7. Bumper Bumper or interior parts for cars 8. Radiator Aluminum 9. Coolant Combustion aid oil for boiler 10 Engine oil Combustion aid oil for boiler 11 Engine Engine or aluminum 12 Batteries Batteries 13 Transmission Car parts or steel products 14 Gear oil Combustion aid oil for boiler 15 Converter Converter 16 Door Car parts or steel products 17 Tire Cement 18 Suspension Steel products or aluminum products 19 Bumper Bumper, interior parts for cars, or tool kit 20 Wheel Steel products or aluminum products section, the Japanese car market will be used as an example of existing reverse supply chain (Figure 3). Car recycling in Japan is a four-step process: (1) The oil, engine, tires, and seats are removed and recycled. (2) The remaining auto body is compressed and shipped to appropriate facilities. (3) In the facilities, the compressed body is shredded and divided into steel, non-steel and other material. (4) The other material, called automobile shredder residue (ASR) is dumped into the sea to create artificial islands. Figure 3. Flow diagram of current recycling of car vehicles in Japan End User 5 million cars per year Dealer Used Car Shop Repair Shops Used Car Export 1 million cars per year 4 million cars per year Disassemblers ASR(17 19%) Recycle as steel, non-steel material (40 60%) Oil, engine, tire, seat, etc. are removed (20 45%)

Currently by car weight, 81-83 percent of cars are recycled. Therefore, the key to success in the future is how the car industry in Japan will recycle the other 19 percent of ASR. Japan currently produces 0.7 million tons of ASR per year and half of it is dumped into the sea to create artificial islands. Japanese Car Recycle Law Availability of fewer landfill sites for waste disposal and the increasing cost of raw materials have forced both the government and companies to implement a new recycling system. In Japan, a Car Recycle Law was implemented in the beginning of 2005. This regulation stipulates that manufacturers are required to make arrangements for recycle and reuse of three categories of used car items the chlorofluorocarbon (CFC), air bags and ASR. The objective of these laws is to decrease the recycling of the shredder dust in Japan. Japanese government monitors any recycling or reuse process. The information is exchanged by an electronic database of consumers, government, and car companies. The goal of the new Japanese recycling law is to increase the recycling rate by over 95 percent by 2015. A recycle fee is collected when the consumer purchases a car. This fee is different for each car brand. When consumers sell the cars to dealers, used car shops, or repair shops; the fees paid with the registration of new or used car are reimbursed to them. Japanese automotive industry 121 Qualitative analysis of Japanese car market In order to measure the impact of the Japanese car recycling law, the material flow diagram of the existing car industry in Japan is analyzed (Figure 4). Both forward and 23 29 Demand Demand for for Raw Import of Material in Raw 22 Case 2 Material Demand for Raw Material 24 26 27 20 Case A: Raw Case B: Raw Check for Material Inventory Material Inventory Sufficient Raw Case 2: Raw Material not Sufficient to 19 Sufficient to Material Inventory not Sufficient Check for Meet Production meet Production Inventory to meet Production Sufficient Requirement Requiment Requirement Reuse Material Inventory 17 Case 1: Reuse Material 28 Inventory Sufficient to Use Raw meet Production Material 16 Requirement 18 Inventory in Raw Material 25 Deficit Reuse case B 14 and Reuse Material Needed Deficit Raw Material Recycled Material Needed for Production Needed for Raw for Production Production Material 21 15 + Use of Reuse 10 Raw Material Material in case2 Inventory Number of Cars + Reused 11 Recycle rate + Reuse Remanufacturers Rate 13 Inventory Number of Cars + Recycled Numbers of Cars 3 4 8 Car + Recycled Production 12 + Car Stock Number of Number of Cars Test and Cars Reused Disassembly Cars + Disposed + Used car Dispose export rate rate 5 Car 6 + Distributuion and Sales Average Consumption + 1 7 [11 year] Number Actual 2 Car of Cars Consumption Collected Used Consumption Reused Data 1993-2003 cars and Forecast for Demand 9 2004-2024 [Car] + Used car Export Number of Cars Recycled Figure 4. Stock flow diagram of the closed loop supply chain for Japanese car market

JMTM 18,2 122 reverse logistics are affected by consumption. Commodity flow in the forward supply chain is driven by customers whereas material flow in the reverse supply chain is also driven by customers who are pushing used products back to manufacturers, recyclers and remanufacturers (Towill and Naim, 2004). Manufacturers in the reuse process try to consume reuse material first, because it is already available in their inventories. If new raw material for production is needed, then car manufacturers have to purchase it from domestic or foreign suppliers. The current Japanese car industry closed loop supply chain is not a usual closed supply chain because it also includes the export of used cars. The import of new raw material mainly comes into manufacturers inventories. Cars are exported as new, used, or scrapped. Disposal of ASR is typically done by dumping it into the sea to create artificial islands. A Japanese car s useful life is estimated to be an average of 11 years which is shorter than in the USA because of different criteria based on the government motor vehicle inspection style and culture (Anonymous, 2004). In the schematic stock flow diagram (Figure 4), six pictorial blocks are used to represent flows, delays, converters, stocks, jumping link, and link catcher. Flow is a circle block which stands for activities affected by various variables in the system. Converters (or auxiliary variables) are shown as diamond blocks to represent rates which are not affected by various activities in the system. Delay blocks (shown as curved rectangles appended with an arrow) introduce pipeline time delay. Stock blocks (shown as cylinders) shows accumulation of inventory. The jumping link (shown as a pentagon heading up) forwards the flow data to jumping catcher (a pentagon heading down). Various flows, delays, stocks and converters annotated with a numbering system in Figure 4, are listed in Table II. Quantitative analysis of Japanese car market In this section, various relationships between major business entities are shown by algebraic equations used in SD simulation with computer software titled The Simulation Tool and Knowledge Network (SimTakn) (Ikeda, 2003) and Excel. The selection of SimTakn for this study was simply based on the fact that it is an inexpensive tool available for SD analysis. Mathematical formulation We illustrate below the algebraic equations used to calculate used car export, re-manufacturers inventories and raw material inventories. The units of the variables used in the SD model equations are in terms of cars except rate variables are in percents. The algebraic equation (1) below for used car export (correspond to flow activity 9 in Figure 4) in the SD model is given by: Used car export ¼ Collected used cars Used car export rate þðtest and disassemble cars 2 Number of cars reused 2 Number of cars recycled 2 Number of cars reused 2 Number of cars disposedþ ð1þ where

Forward logistics Forward logistics 1. Actual consumption data (1993-2003) and forecast (2004-2024) 16. Raw material and reused material needed for production 2. Car consumption demand 17. Case 1: reuse material inventory sufficient to 3. Car production meet product requirement 4. Car stock 18. Deficit reuse material needed for production 5. Car distribution and sales 19. Check for sufficient reuse material inventory 20. Case 2: reuse material inventory not sufficient Reverse logistics to meet production requirement 6. Average consumption 21. Use of reuse material in case 2 7. Collected used cars 22. Demand for raw material 8. Test and disassembly cars 23. Demand for raw material in case 2 9. Used car export 24. Case A: raw material inventory sufficient to 10. Number of cars reused meet production requirement 11. Remanufacturers inventory 25. Deficit raw material needed for production 12. Number of cars disposed 26. Check for sufficient raw material inventory 27. Case B: raw material inventory not sufficient 13. Number of cars recycled to meet production requirement 14. Recycled raw material 28. Use of reuse material in case B 15. Raw material inventory 29. Demand for import of raw material Note: Numbered in the sequence of occurrence in Figure 4 Japanese automotive industry 123 Table II. List of flows, delays, stocks and converters Collected used cars ¼ DELAYðcar consumption demand; average delay time in Japan ð11 yearsþ; 0Þ ð2þ Test and disassemble cars ¼Collected used cars ð1 2 Used car export rateþ Number of cars reused ¼ Test and disassemble cars Reuse rate Number of cars recycled ¼ Test and disassemble cars Recycle rate ð3þ ð4þ ð5þ Number of cars disposed ¼ Test and disassemble cars Dispose rate The flow activities described by equations (2)-(6) above correspond to annotated labels 7, 8, 10, 13, and 12 in the stock flow diagram shown in Figure 4. Noting the fact that cars in Japan retire in 11 years; the delay variables Average Consumption in stock and flow diagrams of Figures 3 and 4 are treated as pipeline delay. The assumption in our SD model is that the outflow of the pipeline delay is zero until, at a time equal to the average delay, the entire pulse input flows out of the delay chain into the Collected Used Cars for that year. As mentioned before, manufacturers try to use the reuse material first. In this section, two cases delineate the use of reuse material in the SD model. The first case, case 1 is based on the adequate availability of reuse material in the inventory to ð6þ

JMTM 18,2 satisfy the raw material required to support demand requirement for cars. The second case, case 2 is based on lack of sufficient reuse material availability in inventory to meet demand requirements for cars. The algebraic equation (7) for the remanufacturers inventory over time t is given by: 124 Remanufacturers inventoryðtþ ðcorrespond to flow activity 11Þ ¼ Z t 0 ½Number of car reused 2 {ðcase 1 : reuse material inventory sufficient to meet production requirementþ or ðcase 2 : reuse material inventory not sufficient to meet production requirementþ}šdt þ Remanufactures inventory ð0þ ð7þ Beside reflecting the remanufacturers behaviors in the SD model by case 1 and case 2, the two other cases, case A and case B, should also be considered for the use of raw material. The first case, case A is based on the adequate availability of domestic raw material inventory to satisfy the total raw material requirement to support demand for cars. The second case, case B is based on lack of domestic raw material inventory availability to meet demand requirements for cars. Therefore, in case B, manufacturers import raw material to satisfy the consumers car demand. The algebraic equation for raw material inventory (8) over time t is given by: Raw material inventoryðtþ ðcorrespond to flow activity 15Þ ¼ Z t 0 ½Recycled raw material 2 {ðcase A : raw material inventory sufficient to meet production requirementþ or ðcase B : raw material inventory not sufficient to meet production requirementþ}šdt þ Raw material inventory ð0þ ð8þ The other equations (9) through (27) used in the simulation model, developed from the stock flow diagram for the Japanese closed loop supply chain (Figures 4) are described below. Raw material inventory (0) and remanufacturers inventory (0) are both set to 0 in this study. Raw material and reuse material needed for production ð9þ ðcorrespond to flow activity 16Þ ¼Car production ðin car unitsþ Car consumption demand ðcorrespond to flow activity 2Þ ¼ Actual consumption data 1993 2 2003 and forecast for 2004 2 2024 ð10þ Car production ðcorrespond to flow activity 3Þ ¼ Car consumption demand ð11þ

Car stock ðtþ ðcorrespond to stock activity 4Þ ¼ Car stock ðt 2 dtþþðcar production 2 car distribution and salesþdt þ Car stock ð0þ Car distribution and sales ðcorrespond to flow activity 5Þ ¼ Car production Recycled raw material ðcorrespond to flow activity 14Þ ¼ Number of cars recycled Demand for raw material ðcorrespond to flow activity 22Þ ¼ Raw material and reuse material needed for production Deficit reuse material needed for production ðcorrespond to flow activity 18Þ ¼Number of cars reused 2 Raw material and reuse material needed for production Check for sufficient reuse material inventory ðcorrespond to flow activity 19Þ ¼ {1; If deficit reuse material needed for production. 0; 0; otherwise:} Case 1 : Reuse material inventory sufficient to meet product requirement ðcorrespond to flow activity 17Þ ¼jCheck for sufficient reuse material inventory ðyes ¼ 1Þ 2 1j; where jjrepresents absolute value. Case 2 : Reuse material inventory not sufficient to meet production requirement ðcorrespond to flow activity 20Þ ¼jCheck for sufficient reuse material inventory ðno ¼ 0Þ 2 1j Use of reuse material in case 2 ðcorrespond to flow activity 21Þ ¼ Case 2 : reuse material inventory not sufficient to meet product requirement Number of cars reused Demand for raw material in case 2 ðcorrespond to flow activity 23Þ ¼ Case 2 : reuse material inventory not sufficient to meet product requirement ðdemand for raw material 2 Number of cars reusedþ Deficit raw material needed for production ðcorrespond to flow activity 18Þ ¼Recycled raw material 2 Demand for raw material in case 2 Check for sufficient raw material inventory ðcorrespond to flow activity 26Þ ¼{1; If deficit raw material needed for production. 0; 0; otherwise:} ð12þ ð13þ ð14þ ð15þ ð16þ ð17þ ð18þ ð19þ ð20þ ð21þ ð22þ ð23þ Japanese automotive industry 125

JMTM 18,2 126 Case A : raw material inventory sufficient to meet production requirement ðcorrespond to flow activity 24Þ ¼jCheck for sufficient raw material inventory ðyes ¼ 1Þ 2 1j Case B : raw material inventory not sufficient to meet production requirement ðcorrespond to flow activity 27Þ ¼jCheck for sufficient raw material inventory ðno ¼ 0Þ 2 1j Use raw material inventory in case B ðcorrespond to flow activity 28Þ ¼ Case B : raw material inventory not sufficient to meet production requirement Recycled raw material Demand for import of raw material ðcorrespond to flow activity 29Þ ¼ Case B : raw material inventory not sufficient to meet production requirement ðdemand for raw material in case 2 2 Recycled raw materialþ ð24þ ð25þ ð26þ ð27þ Model testing Many modelers have developed specific tests to validate SD model conditions (Forrester, 1961; Forrester and Senge, 1980). These tests enable discovering weaknesses (or flaws) in the SD model. The extreme condition (also called structure validation) test and behavior sensitivity test are often used for the SD model validation. During the behavior sensitivity test, modelers change the parameters and observe which parameters are highly sensitive and then compare whether this behavior matches the real system (Barlas, 1996). Therefore, in order to compare whether model behavior matches real system or not, historical performance data is required. In our case, compatible long-term historical data were not available for reverse supply chain and impact of government ELV regulations. Thus, only the extreme condition test is conducted in this study. The extreme condition test involves assigning extreme values for selected model parameters and comparing the model generated behavior to the observed behavior of the real system under the same extreme conditions (Barlas, 1996). During the structure validity phase in the extreme condition test, modelers check out whether each flow and stock equation makes sense even when their inputs take on extreme values and the model responds plausibly when subjected to extreme policies, shocks and parameter changes (Sterman, 2000). In this section, two extreme conditions are illustrated as an example by using car consumption demand. By subjecting these extreme conditions, the anticipated behavior of the model can be observed. In the first test, the maximum car consumption demand is examined to observe the behavior. For example, economic boom resulted in increased car consumption. The anticipated behavior is increasing raw material demand to meet domestic car consumption demand. Figure 5 shows the resulting behavior under the condition in which sales increased 500 percent in 2004 and increased 5 percent each year thereafter.

The anticipated behavior is increased raw material demand for Japan covered through import when cars have reached the end of useful life after 2004. In the case of the US, since the average useful life of a car is 14 years counting from the base year 1993, the increased raw material demand covered through domestic sources or import will occur from 2007 onwards. The downward blip in raw material demand in the year after 2013 in both graphs in Figure 5 is the result of increased recycled raw material availability in that year. In the second test, the minimum car consumption demand (sales ¼ zero) is used for the extreme condition test after 2004. For instance, company develops something which is a substitute for the car, etc. The anticipated behavior is raw material demand reduced to zero, shown in Figure 6. Observing these extreme conditions, the model tests suggest that the models are reliable and can be used to explore closed loop supply chains for both Japan and the USA. Japanese automotive industry 127 Japanese car consumption forecast Car consumption and recycle data are used for the period 1983-2024. The simulation model uses data for the real car vehicle consumption during 1983-2003 in Japan 70,000,000 60,000,000 Cars 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Year 2024 Car Consumption Forecast Demand for Import of Raw Material Figure 5. Result of the behavior (demand for raw material) under the maximum extreme condition 70,000,000 60,000,000 Cars 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 2004 2006 2008 2010 2012 2014 Year 2016 2018 2020 2022 2024 Car Consumption Forecast Demand for Import of Raw Material Figure 6. Result of the behavior (demand for the raw material) under the minimum extreme condition

JMTM 18,2 128 (JAMA, 2004). From 2004 to 2024 consumption is estimated using Holt s (exponential smoothing forecast with trend approach) for the Japanese model. Forecasting time series that exhibit linear trend In the Japanese market, we believe the trend of the car vehicle consumption can be observed as a linear trend with a small growth rate which needs to be validated. The model to forecast a time series that exhibits a linear trend is: Y t ¼ B 0 þ B 1 tþ [ t In this model, B 0 represents the y intercept and B 1 the slope of the time series. [ t is the random error at time t. Linear regression can be used to test for trend. If p value is small (less than (a) we can conclude that a linear trend model is appropriate. Regression approach (Table III) determined that a linear trend in Japanese car sales as p-value for B 1 coefficient was less than 0.05. The next step is to select a forecasting method. One technique is to use the regression equation based on the historical time series data to forecast future time series values. Although theoretically the regression equation should only be used within the range of observed value of t (from 1 to n), as long as the period we wish to forecast is not too far into the future, using the regression equation should give a reasonable forecast. The forecast for a time period t is obtained by substituting value of t into the regression equation. Suppose there are n values of the time series and we wish to forecast values for periods n þ 1, n þ 2, n þ 3, and so on. One potential draw back of the regression approach is that the formulae used to determine the vales for the y intercept (B 0 ) and slope (B 1 ) of the regression line treat all time series points equally. Consequently, earlier observations of the time series from periods 1 and 2 have as much influence on these estimates as later values from periods n 2 1 and n. Holt s linear exponential smoothing is one of the effective forecasting tools for time series that exhibit a linear trend. Time series data to which this technique is appropriate has a level that is smooth or slowly changing and non-seasonal; and trend that is smooth, slowly changing rate of change of level. This technique is based on the assumption that the trend tends to flatten towards end of data. The new forecast is the sum of smoothed level and smoothed trend; each described by the following relationships given in equations (28) and (29). Smoothed level ¼ a ðlast period s actual salesþþð1 2 aþ Last period s forecast Smoothed trend ¼ g ðthis period smoothed level 2 Last period smoothed levelþð1 2 gþ Smoothed trend for last period ð28þ ð29þ where a is the smoothing factor for level, and g is the smoothing factor for trend. Higher values for a smoothing constant a for the level and smoothing constant g for the trend place more weight on the recent values. On the other hand, if the time series level and trend change slowly, lower values are assigned to smoothing constants. Number of (a, g) combinations were tried to forecast Japanese car sales. We choose a ¼ 0.1 and g ¼ 0.2 for Japanese car sales projections as this combination generated

Summary output Regression statistics Multiple R 0.874803579 R 2 0.765281302 Adjusted R 2 0.757709731 Standard error 414,142.6592 Observations 33 ANOVA Df SS MS F Significance F Regression 1 1.73354 10 þ 13 1.73354 10 þ 13 101.0729891 2.82087 10 þ 11 Residual 31 5.31694 10 þ 12 1.71514 10 þ 11 Total 32 2.26524 10 þ 13 Upper 95.0 percent Lower 95.0 percent Upper 95 percent Lower 95 percent Coefficients Standard error t-stat p-value Intercept 2,300,664.152 147,526.6253 15.59490802 3.18551 10 þ 16 1,999,781.448 2,601,546.855 1,999,781.448 2,601,546.855 X variable 1 76,117.8877 7,571.277659 10.05350631 2.82087 10 þ 11 60,676.1565 91,559.6189 60,676.1565 91,559.6189 Probability output Residual output Observation Predicted Y Residuals Percentile Y 1 2,376,782.039 25,974.96078 1.515151515 2,286,795 2 2,452,899.927 174,187.0731 4.545454545 2,402,757 3 2,529,017.815 424,008.1854 7.575757576 2,449,429 4 2,605,135.702 2318,340.7023 10.60606061 2,500,095 5 2,681,253.59 56,387.40998 13.63636364 2,627,087 6 2,757,371.478 2307,942.4777 16.66666667 2,737,641 7 2,833,489.365 2333,394.3654 19.6969697 2,854,176 8 2,909,607.253 252,897.25312 22.72727273 2,856,710 9 2,985,725.141 51,147.85918 25.75757576 2,866,695 10 3,061,843.029 2207,667.0285 28.78787879 2,953,026 (continued) Japanese automotive industry 129 Table III. Linear regression table showing estimated coefficient of the regression line for Japanese car consumption

JMTM 18,2 130 Table III. 11 3,137,960.916 2271,265.9162 31.81818182 3,036,873 12 3,214,078.804 2175,806.8039 34.84848485 3,038,272 13 3,290,196.692 2154,585.6916 37.87878788 3,095,554 14 3,366,314.579 2270,760.5793 40.90909091 3,104,083 15 3,442,432.467 2338,349.467 43.93939394 3,135,611 16 3,518,550.355 2372,527.3547 46.96969697 3,146,023 17 3,594,668.242 2319,868.2424 50 3,274,800 18 3,670,786.13 46,572.86988 53.03030303 3,717,359 19 3,746,904.018 656,844.9822 56.06060606 4,093,148 20 3,823,021.906 1,279,637.094 59.09090909 4,154,084 21 3,899,139.793 969,093.2068 62.12121212 4,199,451 22 3,975,257.681 478,754.3191 65.15151515 4,210,168 23 4,051,375.569 148,075.4314 68.18181818 4,259,872 24 4,127,493.456 82,674.54367 71.21212121 4,289,683 25 4,203,611.344 240,293.656 74.24242424 4,403,749 26 4,279,729.232 388,998.7683 77.27272727 4,441,354 27 4,355,847.119 136,158.8806 80.3030303 4,443,905 28 4,431,965.007 2338,817.0071 83.33333333 4,454,012 29 4,508,082.895 2353,998.8948 86.36363636 4,460,014 30 4,584,200.783 2324,328.7825 89.39393939 4,492,006 31 4,660,318.67 2370,635.6702 92.42424242 4,668,728 32 4,736,436.558 2295,082.5579 95.45454545 4,868,233 33 4,812,554.446 2352,540.4456 98.48484848 5,102,659

smallest forecast errors for Japanese car sales projection. The resulting vehicle consumption graphs using actual and forecast data are shown in Figures 7 and 8. Japanese end of life vehicle recovery rates In the base scenario analysis for Japan, actual percents are used for dispose, reuse and recycle of cars that reached their end of lives and export rates (in 2003) of used cars Japanese automotive industry 131 6,000,000 5,000,000 4,000,000 Cars 3,000,000 2,000,000 1,000,000 5,400,000 0 1971 1973 1975 1977 1979 1981 1983 1985 1987 Year 1989 1991 1993 1995 1997 1999 2001 2003 Figure 7. Japanese motor vehicle consumption from 1971 to 2003 5,300,000 5,200,000 5,100,000 5,000,000 Cars 4,900,000 4,800,000 4,700,000 4,600,000 4,500,000 4,400,000 2004 2006 2008 2010 2012 2014 Year 2016 2018 2020 2022 2024 Figure 8. Japanese motor vehicle consumption forecast for the period 2004-2024

JMTM 18,2 132 from Japanese government statistics is shown in Table IV (Ministry of Economy, Trade and Industry, 2004). The simulation model uses Japanese government goals to achieve 95 percent recycle rate and also to reduce disposal rate from 17.5 percent in 2003 to 5 percent in 2015. The 12.5 percent reduction in disposal rate by 2015 is equally distributed to 2003 reuse and recycle rates, each of them increase by 6.25 percent, respectively. Further, the dispose rate used in this study will be 0 percent by 2023. A breakdown of dispose, reuse and recycle rates for vehicles reaching their end of lives is shown in Table V. Japanese used car export rate It is also necessary to have a clearer understanding of the impact of used car export on emerging countries. For example, the EU has already implemented the ELV since the start of 2002. Both recycling and political systems are slightly different between EU and Japan. The research indicates the EU s ELV has made significant impact on the used car market in emerging countries. According to the Czech News Agency (2003), Czech Republic s import of used cars doubled in 2002 compared to 2001. About ninety percent of used cars in 2002 came from Germany, France, Italy and Belgium. Nearly, 67 percent of the imported cars in the Czech Republic were from Germany (Table VI). Furthermore, in Poland used Table IV. Japanese end of life vehicle recovery rates and used car export rate 2003 Dispose rate 80 percent 17.5 percent Reuse rate 32.5 percent Recycle rate 50 percent Used car export rate 20 percent Source: Ministry of Economy, Trade and Industry (2004) Table V. Japanese end of life vehicle recovery rates summary 2003 and 2015 2003 (percent) 2015 (percent) Dispose rate 17.5 5 Reuse rate 32.5 38.75 Recycle rate 50 56.25 Case in Czech Republic in 2002 Case in Poland in 2003 Table VI. Used car imports case in Czech Republic in 2002, and in Poland in 2003 Used car import has increased about twice in 2002 from 2001 90 percent used imported cars came from Germany, France, Italy and Belgium in 2002 Used car consumption has increased by 257.6 percent in 2003 compared to 2002 New car sales decline by 32.1 percent in 2003

car consumption has increased by 257.6 percent, when comparing 115,257 units for eight months in 2002 with 400,000 units during the same period in 2003. Also, this trend has forced the new car sales decline by 32.1 percent. Poland s number one retailer Fiat has had their sales decline by 58 percent (Table VI) (Automotive News Europe, 2004). Thus, the ELV in Europe has greatly impacted not only used car export, but also sales of new cars. The SD model assumes an increase in used cars export for Japan of 50 percent from 2003 to 2004, and subsequent annual increase of additional 1 percent during the period 2004-2023. These numbers are based on statistics on the export of used cars to East European countries (Automotive News Europe, 2004). The used car export rate increase in subsequent years (starting 2004) is assumed to be a pessimistic number for the analysis because Japan has different political system and geographical limitations in exporting to other countries (Anonymous, 2005). Japanese automotive industry 133 Base scenario analysis Figure 9 shows the number of cars reaching their end of lives that will be reused, recycled, and disposed in Japan during the period 2004-2023. These results are generated from a SD simulation model. Recycling and reuse fluctuated because both are affected by consumption, however, recycling will be affected more than reuse. Moreover, the volume of recycling and reuse are decreasing gradually. The dispose rate is decreasing as well, however, the volume itself is small. Thus, from a logistical point of view, the dispose rate is more or less the same. Japan has no material resources within the country. Thus, manufacturers have to import raw material to maintain the production. Figure 10 shows Japanese demand for the import of raw material (2004-2024). 4,000,000 3,500,000 3,000,000 Cars 2,500,000 2,000,000 1,500,000 1,000,000 Number of Cars Reused Number of Cars Recycled Number of Cars Disposed 500,000 0 2004 2006 2008 2010 2012 2014 Year 2016 2018 2020 2022 2024 Figure 9. Japanese used cars dispose, reuse, and recycle amounts during 2004-2024

JMTM 18,2 4,000,000 3,500,000 3,000,000 134 Cars 2,500,000 2,000,000 1,500,000 1,000,000 Figure 10. Japanese demand for import of raw material 500,000 0 2004 2006 2008 2010 2012 2014 2016 Year 2018 2020 2022 2024 Final finding pertain to increase in used car export as shown in Figure 11. Since, the Japanese manufacturer does not need to pay the recycling, reuse, and disposing fees and due to strong demand from emerging countries for used cars, manufacturers will export more used cars. Greater demands to export used cars affect the significantly declining volume of reuse and recycle material. Dynamic analysis Although, the base scenario analysis is important, another set of scenario analyses is conducted by changing the parameters in the SD model. In investigating different 4,000,000 3,500,000 3,000,000 2,500,000 Cars 2,000,000 1,500,000 1,000,000 Figure 11. Japanese yearly used car export 500,000 0 2004 2006 2008 2010 2012 2014 2016 Year 2018 2020 2022 2024

scenarios for the Japanese model, the baseline case, where the used car export rate (increased 50 percent from 2003 to 2004) provides useful insight. The four scenarios studied included used car export rate decrease/increase of 250, 0, 100 and 150 percent, respectively, from 2003 to 2004. Figure 12 shows the impact of the used car export rate decrease/increase (for different scenarios used relative to the base scenario) on the amount of yearly raw material import for Japan. Investigating the scenarios selected for Japanese car markets, clearly the SD model results show the predictable behavior. Figure 12 shows Japan s car industry will import higher or lower amounts of raw material depending upon Japanese used car export rate is larger or smaller than baseline case. Japanese automotive industry 135 Conclusions and recommendations In this study, we have examined relationships between reduce, reuse, recycle and disposal in the Japanese car market with base scenario analysis using the car consumption data and forecast. The SD model was also subjected to an extreme conditions test for structural validity. Dynamic analysis of different market scenarios for the Japanese car industry s reverse supply chain was also conducted that showed the predictable behavior. Japanese ELV regulation will enhance used car export rate. Since, the Japanese Government did not impose additional tax on used car export, manufacturers tend to export more used cars. If the government wants to create an efficient closed loop supply chain within Japan, it is essential to impose some recycle tax to control the used car exports. Doing so will improve economic opportunities for remanufacturers, recyclers, government, manufacturers and consumers. Furthermore, by providing a used car export option in Japanese reverse supply chain, we should not lose sight of whether the emerging countries are able to support an efficient reverse supply chain system or not. If they are not, the Japanese government and manufacturers should take initiative to create or support the reverse logistics facilities in export countries as part of their social responsibility. In 2003, 55 percent of the total Japanese used car export was directed to New Zealand (23 percent), UAE (13 percent), England (10 percent), and Russia (9 percent) (JUMVA, 2003). These countries will be the key for creating an efficient new Cars 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2004 2007 2010 2013 Year 2016 2019 2022 Used Car Export Rate = 50% Used Car Export Rate = 0% Used Car Export Rate = 50% (Base) Used Car Export Rate = 100% Used Car Export Rate = 150% Figure 12. Impact of Japanese used car export rate decrease and increase by 250, 0, 50, 100, and 150 percent in 2003-2004 and subsequent additional annual increase of 1 percent on yearly raw material import amounts

JMTM 18,2 136 Japanese closed loop supply chain. This concept will be a win-win situation because Japan can export used cars to these countries to meet their demand. This will also prevent mass disposal and emission problems in these countries. The quality of used cars is surely taken into consideration by the Japanese manufacturers in their export. It will be very difficult for any country to create self-sustainable closed loop supply chains. Both the exporting and importing country should consider creating a cooperative relationship to realize an ideal closed loop supply chain. Japan has a geographical advantage being close to the countries which use right-handed vehicles and these countries have a potential demand for the used cars. Thus, these countries should be included in developing partnerships with the Japanese closed loop supply chain. Companies are often looking at forward supply chains for their products to realize gains in their cash flows and they are ignoring the importance of reverse logistics. However, in the long run, it is important that they look at the reverse supply chain as an essential factor for increasing cash flows because it will reduce raw material cost. If a company wants to minimize possibilities of negative cash flows in a reverse supply chain, it is essential for the company to have a closed loop supply chain perspective when developing new products. Issues pertaining to how product components can be recycled, reused, or remanufactured should be considered during the product design phase. Doing so will surely reduce the cost of parts, raw materials, and also be environmentally friendly. References Ahmed, T.O. (2004), State of World Population Report 2004, United Nations Population Fund PA, New York, NY. Anonymous (2004), The Average Car Life is 10.97 Years in Japan, Nihon Keizai Shimbun, Inc., Tokyo, available at: car.nikkei.co.jp/news/carlife/index.cfm?i ¼ 20041115c0002c4. Anonymous (2005), Used-car exports accelerating, Nikkei Plus One, Tokyo, June 4, p. P2. Automotive News Europe (2004), Polish new-car sales plummet (10/07/2004), Automotive News Europe, available at: www.autonews.com/news.cms?newsid ¼ 10177. Barlas, Y. (1996), Formal aspects of model validity and validation in system dynamics, System Dynamics Review, Vol. 8 No. 1, pp. 43-7. Czech News Agency (2003), Import of used cars nearly double in Jan-May, Czech News Agency. Energy Data and Modeling Center (2004), Study of Chinese energy, environment and economics, available at: www.ieej.or.jp/edmc/index-e.html Forrester, J.W. (1961), Industrial Dynamics, MIT Press, Cambridge, MA. Forrester, J.W. and Senge, P.M. (1980), Tests for building confidence in system dynamics models, in Legasto, A., Forrester, J.W. and Lyneis, J.M. (Eds), System Dynamics, North Holland, New York, NY, pp. 209-28. Georgiadis, P. and Vlachos, D. (2004), The effect of environmental parameters on product recovery, European Journal of Operational Research, Vol. 157 No. 2, pp. 449-64. Ikeda, M. (2003), New Tool for Improving Planning Capability of Local Government Staff, Toyo University, Gunma. JAMA (2004), Active Matrix Data System, Japan Car Manufacturers Association, Tokyo.

JUMVA (2003), Used Car Export, The Japan Used Motor Vehicle Exports Association, Tokyo. Krikke, H. and Ie Balanc, I. (2004), Product modularity and the design of closed looped supply chains, California Management Review. Kumar, S. and Fullenkamp, J. (2004), Analysis of European environmental directives and producer responsibility requirements, Int. J. Service and Standards, Vol. 1 No. 3, pp. 379-98. Ministry of Economy, Trade and Industry (2004), WG Report, Sangyoukouzou Shigikai, Tokyo. Naim, M.M. and Towill, D.R. (1994), Establishing a framework for effective materials logistic management, International Journal of Logistics Management, Vol. 5 No. 1, pp. 81-8. OECD (2004), Passenger Cars, OECD Main Economic Indicators (MEI), Organization for Economic Co Operation and Development, Paris, September, p. 10. Peugeot-Citron (2003), Market overview: China, PSA Peugeot-Citron, Vol. 46 No. 2. Rand, G. (2005), Reverse logistics: quantitative models for closed-loop supply chains, Journal of the Operational Research Society, Vol. 56 No. 6, pp. 752, 2/3. Seitz, A.M. and Peattie, K. (2004), Meeting the closed-loop challenge: the case study of remanufacturing, California Management Review, Vol. 46 No. 2, pp. 74-89. SMMT (2003), Motor Vehicles Worldwide 2003, The Society of Motor Manufacturers and Traders Limited, London. Sterman, D.J. (2000), Business Dynamics, Irwin McGraw-Hill, Boston, MA. Stock, J.R. (1992), Reverse Logistics, Council of Logistics Management, Oak Brook, IL. Tibben-Lembke, R. (1998), The impact of reverse logistics on total cost of ownership, Journal of Marketing Theory and Practices, Vol. 6 No. 4, pp. 51-60. Thiery, M. (1995), Strategic issues in product recovery management, California Management Review, Vol. 37 No. 2, pp. 114-20. Towill, D.R. and Naim, M.M. (2004), The impact of information transparency on the dynamic behaviour of a hybrid manufacturing/remanufacturing system, International Journal of Production Research, Vol. 42 No. 19, pp. 4135-52. Ueno, K. (2003), Current status of home appliance recycling in Japan, ECP Newsletter, The Japan Environmental Management Association, No. 18, available at: www.jemai.or.jp/ english/dfe/pdf/18_4.pdf Yamayoshi, K. (2004), Illegal Abandonment of Gifu city, move the prefecture, Asashi News Paper. Japanese automotive industry 137 Further reading Frink, L. (2004), Poles go on a used-car shopping spree; new-car sales plunge as consumers buy in Western Europe, News Europe, Vol. 4. Suzuki Motor (2000), Environment Report. Shizuoka: Japan, available at: www.suzuki.co.jp/cpd/ koho_j/kankyo/pdf/kankyo0703.pdf Toyota Motors (2003), The state of recycle, available at: www.toyota.co.jp/jp/environment/ recycle/nagoya About the authors Sameer Kumar is a Professor of Decision Sciences and Qwest Endowed Chair in Global Communications and Technology Management in the College of Business, University of

JMTM 18,2 138 St Thomas, Minneapolis, Minnesota. Major areas of research interests include optimization concepts applied to various aspects of global supply chain management, information systems, technology management, product and process innovation, and capital investment justifications. Sameer Kumar is the corresponding author and can be contacted at: skumar@stthomas.edu Teruyuki Yamaoka has an MBA from the University of St Thomas, Minneapolis and BS in Economics from Konan University in Kobe, Japan. Teruyuki had worked as an intern at Kiku enterprises Inc. during 2002-2003. He has also worked as a Japanese business, travel and tour consultant. To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints